"I've lost track of all the times I've given up on you--
But you make such a beautiful wreck, you do." Shawn Mullins
Ray Dalio has termed the US mess and Federal reserve response "A beautiful de-leveraging." I can sort of agree. What shall we call the European example? Bank balance sheets in Spain, Italy and Portugal are swelling with sovereign obligations. SP/IT banks now account for nearly 500B E government IOUs. Global capital markets are held hostage for Club Med auction results and US/German yields are collapsing as a "quality shortage" emerges.
The IMF today projected 2.6B E in balance sheet pull down and a major credit crunch for Europe. GDP- provided there is any - could remain 1.4% below trend as the tear down extends for years. Foreign deposits at Italian banks are down 16.3% this year. Beautiful Wreck seems too kind given Trichet's mistakes with the Ms and hiking rates. Heavy doses of austerity will be socially difficult and painful.
I suggested yesterday on CNBC that the solution lay in getting Sov Debt off the balance sheets for "cash". LTRO only liquefied the scheme and emboldened it. The ESM/EFSF may need to directly invest in banks but there appears to be no political capital to spend on the issue. The ring fencing-fire walling-novena lighting approach to de-levering is not so beautiful. Leverage in the EZ banks remains in the low to mid 20's..4 YEARS AFTER THE FALL. The US zombies are printing Fed backed profits at roughly 11 times. A central banks job is to be there when its financial system learns about gravity. The ECB - poorly missioned - has failed terribly. We'll get at taste tonight (Thurs early session) how bad its going to hurt.